State-backed M&A leaps in Q1 as bank rescues surge

LONDON (Reuters) - State-backed mergers and acquisitions (M&A) more than tripled in the first quarter to $130 billion, as governments rescued ailing banks and state-backed firms used their clout to strike deals.

Thomson Reuters data released Friday showed purchases by governments and state-backed firms provided a huge fillip to an otherwise depressed M&A market, accounting for 30 percent of the quarter's activity. Overall M&A fell 33 percent to $444 billion, the lowest start to the year since 2003.

Professor Scott Moeller, director of the M&A research center at London's Cass Business School, said governments had been forced to arrange a "series of forced marriages" because banks were undercapitalized as the financial crisis unfolded.

"Deals were engineered with the help of central government because the institutions involved were deemed to be too big to fail," Moeller said.

He said the sector would continue to generate M&A as the industry needs to consolidate further but most government-backed deals had already happened.

The British Treasury's $22.3 billion bailout of Lloyds Banking Group and a four-tranche deal for Royal Bank of Scotland

worth a combined $47.8 billion were among the quarter's four largest deals.

Britain could end up owning as much as 77 percent of Lloyds, after its ill-fated takeover of HBOS, and may be left with a stake of 95 percent in RBS.

In France, loss-making banks Caisse d'Epargne and Banque Populaire sealed a merger in which they will be partly nationalized.

Outside financial services, state-backed companies also played a big role, with China's Chinalco agreeing a $19.5 billion deal to buy convertible bonds and asset stakes from Rio Tinto.

In one of Europe's biggest deals, state-owned Swedish power group Vattenfall bought Dutch utility Nuon.

"SYSTEMICALLY IMPORTANT?"

Bankers say that the majority of government-backed deals involving banks have probably been completed, shifting emphasis to other financial services. For example, worries that rising defaults will damage corporate bond portfolios, possibly hitting solvency, are pressuring the shares of life insurers.

"I think we have probably seen the majority of the government-backed deals with banks," said Ian Hart, co-head of European M&A at Citigroup, which has advised the Treasury on the asset-protection scheme.

"Governments will be keeping an eye on other sectors but a key question will be whether these are as systemically important as banks."

(Editing by Andrew Macdonald)